3% Deficit.

Bullseye1

According to this article we need to be down to 3% or 4.89 billion. So we will be still essentially borrowing the guts of 5 billion a year. Surely this is still not sustainable?

(12.4/7.6*3 = 4.89)

Ireland's budget deficit for 2012 was ahead of the Troika target and Government forecast.

New Central Statistics Office figures show the level fell to 7.6% or just over €12.4bn last year.

The deficit is within the EU IMF target of 8.6% of GDP - while the Government projected a level of 8.2%.

Under the bailout deal Ireland has to reduce the debt to GDP ratio to at least 3% by 2015.

source: http://news.eircom.net/breakingnews/21117947/?view=Standard

srsly78

Running a huge deficit here is known as "austerity".

Godge

Bullseye1 wrote: »

According to this article we need to be down to 3% or 4.89 billion. So we will be still essentially borrowing the guts of 5 billion a year. Surely this is still not sustainable?

(12.4/7.6*3 = 4.89)



source: http://news.eircom.net/breakingnews/21117947/?view=Standard

In a normal situation with 2% inflation and 2% growth, a 3% deficit is sustainable, in fact the debt/GDP ratio declines.

spank_inferno

I thought it very interesting how on RTE news they ran the deficit story as a percentage of GDP.

It would have been easier to the people to know how many actual billions of euro the deficit is.

Chips Lovell

Well deficit as a percentage of GDP is the key figure in terms of assessing whether sustainable or not.

Pete_Cavan

spank_inferno wrote: »

I thought it very interesting how on RTE news they ran the deficit story as a percentage of GDP.

It would have been easier to the people to know how many actual billions of euro the deficit is.

Why?

The actual deficit figure (ie the €12.4bn) may fall but if there is also a drop in GDP the deficit is not necessarily becoming more sustainable. Expressing it as a percentage of GDP takes into account the fluctuation in GDP. Giving how many actual billions of euro the deficit is doesnt tell the whole story.

spank_inferno

Pete_Cavan wrote: »

Why?

How may joe-soaps know what Ireland's GDP is?
( I had to look it up!)

Of course deficit as percentage of GDP is the key metric.
But it could very easily have been reported as the Euro value defecit.
Cos at the end of the day its that monies we and our kids will have to repay.

The 3% target is the Maastricht target - it is also the headline rate reported by Eurostat.

Eurostat report is here

In 2012 the lowest government deficits in percentage of GDP were recorded in Estonia (-0.3%), Sweden (-0.5%),
Bulgaria and Luxembourg (both -0.8%) and Latvia (-1.2%), while Germany (+0.2%) registered a government
surplus. Seventeen Member States had deficits higher than 3% of GDP: Spain (-10.6%), Greece (-10.0%), Ireland
(-7.6%), Portugal (-6.4%), Cyprus and the United Kingdom (both -6.3%), France (-4.8%), the Czech Republic
(-4.4%), Slovakia (-4.3%), the Netherlands (-4.1%), Denmark and Slovenia (both -4.0%), Belgium and Poland
(both -3.9%), Malta (-3.3%), Lithuania (-3.2%) and Italy (-3.0%). In all, thirteen Member States recorded an
improvement in their government balance relative to GDP in 2012 compared with 2011, twelve a worsening and
two remained stable.

Scofflaw

It's a target - we could go beyond it.

no, really, I'm totally serious,
Scofflaw

Bullseye1

One would hope. Really 1 billion is the most we should be borrowing. We are far too small to be running up 5 billion every year.

southsiderosie

Vladimir Kurtains wrote: »

Well deficit as a percentage of GDP is the key figure in terms of assessing whether sustainable or not.

I always ask this question when these issues come up: where do these benchmarks actually come from? When they were set, was there any actual empirical rationale, or it just seemed like a good place to set it.

Given all of the hoo-hah over the questionable threshold for the debt to GDP ratio, I'm increasingly skeptical about the universality of these deficit and debt targets: whether or not they are sustainable depends on a whole host of other factors.

SupaNova2

southsiderosie wrote: »

I always ask this question when these issues come up: where do these benchmarks actually come from? When they were set, was there any actual empirical rationale, or it just seemed like a good place to set it.

They're obviously not plucked from thin air. From memory 10% deficits for just a couple of years in a row can push one into hyperinflation territory. Check out Peter Bernholz's Monetary Regimes and Inflation.

Loire

Vladimir Kurtains wrote: »

Well deficit as a percentage of GDP is the key figure in terms of assessing whether sustainable or not.

I'm not sure I agree with this. Fine when things are bad, but say the economy picks up and we start spending/borrowing more. All fine so far, but when a crash comes again we are back to painful re-adjustments downwards like we are having now - public sector pay, HSE cuts etc etc.

Would it not be ideal to limit government spending to what it can take in via taxation?

KyussBishop

SupaNova2 wrote: »

They're obviously not plucked from thin air. From memory 10% deficits for just a couple of years in a row can push one into hyperinflation territory. Check out Peter Bernholz's Monetary Regimes and Inflation.

Bernholz seems to be directly involved in a bunch of questionable right-wing economic think tanks, and his writing seems to fit directly in with the usual type of propaganda these institutes put out; the US deficit spent like crazy during WWII (well past 10%) without such ill effects:


Most hyperinflation scaremongering, of whichever variety, is based on assuming causation where there is only correlation, and in special pleading in cases where the correlation does not fit.

Most of the notable instances of hyperinflation, have simply been due a country owning debts in a foreign currency, and/or suffering a sudden massive loss in economic activity.

Riskymove

Bullseye1 wrote: »

One would hope. Really 1 billion is the most we should be borrowing. We are far too small to be running up 5 billion every year.

well it depends, certainly not for current spending

if its for capital investment I'd be less concerned

Scofflaw

southsiderosie wrote: »

I always ask this question when these issues come up: where do these benchmarks actually come from? When they were set, was there any actual empirical rationale, or it just seemed like a good place to set it.

Given all of the hoo-hah over the questionable threshold for the debt to GDP ratio, I'm increasingly skeptical about the universality of these deficit and debt targets: whether or not they are sustainable depends on a whole host of other factors.

I'd say a combination of those, really, but I'd definitely say that figures like 60%, 90%, 120% are clearly far too rounded to be anything other than arbitrary markers in reality's fuzziness. And as Kyuss points out, usually behind an authoritative-looking treatise on the subject, you'll find assumptions that depend on the political inclinations of the author.

As far as I can see, what's really happening in this crisis is that governments have decided to be guided by right-leaning economists, because following the advice of left-leaning economists last crisis made things worse. Unfortunately, that doesn't guarantee that the advice of the current set of economic augurs and barber-surgeons is necessarily better, and it does put an unfortunate amount of pressure on them to come up with simple answers.

Also unfortunately, the left doesn't seem to be coming up with particularly impressive suggestions - those from the unions, for example, seem simply to be concerned with preserving pay first, and other effects afterwards:

SIPTU President Jack O'Connor has proposed that €1bn worth of savings could be achieved through the proceeds of the promissory note deal and increasing taxes on the wealthy.

He believes proper use of this funding, along with a "significant off balance sheet stimulus programme" and additional taxation of the wealthy could lessen the requirement for a cut in public service pay and pensions.

Mr O'Connor said that it could be used to fund job creation, alleviate hardship for working families and protect public services.

And it's hard not to agree with the response:

The Deputy Chief Executive of Chambers Ireland Sean Murphy has said that SIPTU President Jack O'Connor is talking about spending money the country does not have.

Speaking on RTÉ's Today with Pat Kenny, Mr Murphy described the suggestion as "surreal" given Ireland still has one of the largest deficits in the EU.

He said: "We're borrowing €1.25bn a month and the Troika is in town for the next two weeks kicking the tyres and discussing what are we doing."

Mr Murphy said: "The promissory note deal was about helping us as a State to meet our commitments and those commitments are social welfare, pensions, public service pay, front-line services, the health sector, the health budget."

He said: "We're borrowing too much and that is the fundamental issue and this discussion is in many ways about arguing about money we don't have."

http://www.rte.ie/news/2013/0423/385076-siptu-promissory-note/

cordially,
Scofflaw

General Atomic

The State borrowing money is no different, in principle, to an individual or business doing so; money is borrowed because the return on your investment of that money is greater than the borrowing costs or because you need it to survive. The social cost of not borrowing that money is considered to be greater than the financial cost of eventually paying it back. Cutting our deficit down to Maastricht targets would be ruinous as it would require further tax hikes and public sector cuts, not exactly great for our already weakened economy.

Deficit hawks should stop wasting time on the subject and turn instead to unemployment; that's the real killer right now. We'll keep running up large deficits while the economy is weak and that is primarily caused by mass unemployment and the associated emigration. That's without even considering the social cost of having so many people be unemployed. And before any eejit jumps in whining about social welfare incentivising laziness, keep in mind that there are about 26 unemployed people per open position currently; there simply aren't enough jobs. If it requires deficit spending to create jobs then I'm all for it.

cson

Little bit of fag packet maths on the topic;

Average Annual Earnings 2012 (Per CSO) €33,327

Tax (PAYE + PRSI + USC) on the above for a single person: €6,461

Budget deficit for 2012: €12.4bn

Irish labour force for 2012 (CIA Factbook): 2.1m

Deficit per Irish worker: €5,905

That's just from some rudimentary use of Google and Excel so its not nailed on 100% but you can bet it isn't a million miles off.

To put the insanity of that deficit into perspective; 91% of the average workers tax paid would be needed to pay that deficit off.

I don't think a lot of people realise the extent to which we are in the ****ter. Barring some major positive economic event such as finding a viable oil well in Irish waters you're looking at unborn generations having to shoulder the mistakes of a 10 year period of madness in Irish history. A phenomenal acheivement by all concerned.

srsly78

cson wrote: »

I don't think a lot of people realise the extent to which we are in the ****ter.

After wasting a lot of time "discussing" this with people I think I know why: many of them do not know how many zeroes are in a billion. Because of this they have no sense of proportion and can't tell what is a "drop in the bucket" vs a significant amount.

SupaNova2

KyussBishop wrote: »

Bernholz seems to be directly involved in a bunch of questionable right-wing economic think tanks, and his writing seems to fit directly in with the usual type of propaganda these institutes put out; the US deficit spent like crazy during WWII (well past 10%) without such ill effects:

You previously said you were not going to read his book because of this link( which I think was simply an article written?), so now you have read his writing and deemed it propaganda? do you have even a particular paragraph of "propaganda" you can show now that you have read his writing?

WWII deficits didn't cause inflation due to mass rationing and price controls, so unless that is part of your plan, those type of deficits typically will cause high inflation.

Scofflaw

cson wrote: »

Little bit of fag packet maths on the topic;

Average Annual Earnings 2012 (Per CSO) €33,327

Tax (PAYE + PRSI + USC) on the above for a single person: €6,461

Budget deficit for 2012: €12.4bn

Irish labour force for 2012 (CIA Factbook): 2.1m

Deficit per Irish worker: €5,905

That's just from some rudimentary use of Google and Excel so its not nailed on 100% but you can bet it isn't a million miles off.

To put the insanity of that deficit into perspective; 91% of the average workers tax paid would be needed to pay that deficit off.

I don't think a lot of people realise the extent to which we are in the ****ter. Barring some major positive economic event such as finding a viable oil well in Irish waters you're looking at unborn generations having to shoulder the mistakes of a 10 year period of madness in Irish history. A phenomenal acheivement by all concerned.

That assumes that the only source of tax is income tax, which isn't the case. Income tax was only about a quarter of the tax take in 2008, which is the latest set of figures I can find quickly.

cordially,
Scofflaw

cson

Scofflaw wrote: »

That assumes that the only source of tax is income tax, which isn't the case. Income tax was only about a quarter of the tax take in 2008, which is the latest set of figures I can find quickly.

cordially,
Scofflaw

Point taken but you can still see where I'm coming from - 91% of taxes levied on wages and salaries in this country would be required to cover that deficit. That's an astronomical statistic whatever way you look at it.

srsly78

Consider that in the UK all income tax receipts together do not even cover the welfare budget (very probably the same here too).

Solair

I'd like to see what the Eurozone deficit is as a whole.

Geuze

Here you go:

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22042013-AP/EN/2-22042013-AP-EN.PDF


EZ17 fiscal deficit = 3.7% of GDP

EU27 fiscal deficit = 4%

SupaNova2

Scofflaw wrote: »

I'd say a combination of those, really, but I'd definitely say that figures like 60%, 90%, 120% are clearly far too rounded to be anything other than arbitrary markers in reality's fuzziness. And as Kyuss points out, usually behind an authoritative-looking treatise on the subject, you'll find assumptions that depend on the political inclinations of the author.

Well sweet Jaysus, round figures are of course arbitary, you hardly expect a decimal number to six decimal places defining an inflection point that is always true!?.

KyussBishop

SupaNova2 wrote: »

You previously said you were not going to read his book because of this link( which I think was simply an article written?), so now you have read his writing and deemed it propaganda? do you have even a particular paragraph of "propaganda" you can show now that you have read his writing?

WWII deficits didn't cause inflation due to mass rationing and price controls, so unless that is part of your plan, those type of deficits typically will cause high inflation.

He was on the board of Mont Pelerin society (one of the most notorious Koch-linked think-tanks), and Centre for the New Europe (a think tank linked to climate change denial, and within the same right-wing think tank network).

His writing fits in with the usual right-wing propaganda in scaremongering over public spending and particularly hyperinflation, and selective use of historical facts to support his claims; you just need one example (the US during WWII) to debunk the deficit-scaremongering in particular.

On that note as well: You engage in special pleading here with the US during WWII, as it does not matter what helped with deficit spending, because as a counterexample it already totally debunks the claim that deficits are a cause of hyperinflation, and not just correlated.

With that debunked, you can't assume high-inflation-by-default and say that you strictly need rationing or price controls to avoid it; you'd need to start from scratch and explain the mechanism.


As it is, inflation is pretty simple: So long as the money spent isn't running up against resource bottlenecks, then you aren't going to be causing excessive inflation.
That's pretty much what inflation is - too much money/demand chasing a limited supply, causing the price of the resource to increase, and labour is the most important resource, because full employment is the resource bottleneck, that sets the limit on deficit spending.

What you really need to show with a hyperinflation argument, is the exact resource bottleneck government is supposed to run up against, not some vague arguments that deficits in general 'might' be bad (based upon material that tries to imply causation from correlation).

SupaNova2

KyussBishop wrote: »

His writing fits in with the usual right-wing propaganda in scaremongering over public spending and particularly hyperinflation

So you have actually read him? Can you give a quote of his "scaremongering"?

On that note as well: You engage in special pleading here with the US during WWII, as it does not matter what helped with deficit spending, because as a counterexample it already totally debunks the claim that deficits are a cause of hyperinflation, and not just correlated.

LOL. In the same breadth as mentioning correlation does not prove causation, you think you have debunked the argument with an instance where they don't correlate. Funny.

With that debunked

Explain the mechanism.

Again? Supply and demand, it applies to money as well as any other good. Flood the market with milk, and the price of milk will drop, flood the market with currency through deficit spending and the price of currency will drop.

Scofflaw

SupaNova2 wrote: »

Well sweet Jaysus, round figures are of course arbitary, you hardly expect a decimal number to six decimal places defining an inflection point that is always true!?.

In a science, yes. In economics, it serves as a reminder that economics is not a science - a point worth making, because economics is fond of pretending to a scientific rigour it doesn't possess.

cordially,
Scofflaw

cson

Scofflaw wrote: »

In a science, yes. In economics, it serves as a reminder that economics is not a science - a point worth making, because economics is fond of pretending to a scientific rigour it doesn't possess.

cordially,
Scofflaw

Tell that to the site cat mods

KyussBishop

SupaNova2 wrote: »

So you have actually read him? Can you give a quote of his "scaremongering"?

There's a good breakdown of some of his hyperinflation scaremongering in the wake of the crisis, here:
http://bilbo.economicoutlook.net/blog/?p=7456

SupaNova2 wrote: »

LOL. In the same breadth as mentioning correlation does not prove causation, you think you have debunked the argument with an instance where they don't correlate. Funny.

It takes just one example of showing high deficit-to-GDP ratio's did not lead to hyperinflation, to debunk the simplistic allusion that there is a causation between deficit-to-GDP and hyperinflation.

Obviously, in light of the counterexamples, the mechanics of hyperinflation are more complicated than that, and you have to delve into describing the actual mechanics of it on a case-by-case basis (pointing to defict-to-GDP levels will not do).

SupaNova2 wrote: »

Again? Supply and demand, it applies to money as well as any other good. Flood the market with milk, and the price of milk will drop, flood the market with currency through deficit spending and the price of currency will drop.

You're talking about defict-to-GDP levels here, not money creation; there is no new money, it is sourced from debt.

Also, the demand for money is not a constant, and it is not the measure of inflation either; demand for money is affected by the level of economic activity, including the number of goods produced, which again goes back to the price level, i.e. inflation and resources bottlenecks etc..

You don't avoid the need to talk about resource bottlenecks (including that of labour) as the driver of inflation, by talking about demand for money.

SupaNova2

KyussBishop wrote: »

There's a good breakdown of some of his hyperinflation scaremongering in the wake of the crisis, here:
http://bilbo.economicoutlook.net/blog/?p=7456

He points out that Bernholz doesn't talk about a collapse in industry as a factor(which I think he actually covers in parts of the book). A collapse in industry alone cannot cause continuous hyperinflation. His other main point is hey look at WWII. Drafting 2/3's of your adult population into the army, putting them on rations having them occupied all of their waking hours building weapons or gunning down the enemy leaves little room to bid up a cpi that won't show much with price controls. And the author's other points miss mostly due to a complete misunderstanding of Bernholz on loanable funds theory.

Also can you define what you consider scaremongering? Most would describe it as using fear to make your argument. Can you give an example of Bernholz trying to whip up fear? Also are you aware that he doesn't currently think there is much danger of hyperinflation in the US? To quote him:
“But does this mean that inflation may evolve into a hyperinflation in the United States? I believe not.”

Obviously, in light of the counterexamples, the mechanics of hyperinflation are more complicated than that.

His thesis or his book isn't merely large deficit -> hyperinflation, feedback loops, capital controls, the willingness of the government to pullback and more are covered.

You're talking about defict-to-GDP levels here, not money creation; there is no new money, it is sourced from debt.

What happened your theory of debt free money? Hard to have a discussion with you if you keep switching things up. And in either case you should know by now, I'm sure MMT stresses it enough, that new money is created by CB's to fill the gap when debt issued cannot be covered by sales to existing currency holders.

Also, the demand for money is not a constant, and it is not the measure of inflation either; demand for money is affected by the level of economic activity, including the number of goods produced, which again goes back to the price level, i.e. inflation and resources bottlenecks etc..

Bernholz and I agree, and also add that demand for money/currency is affected by its store of value function, no-one wants to hold a currency that rapidly depreciates.

hfallada

I think you need to take into account the structure of the country population. Is Germany who have a rapidly aging population going to be able to sustain a 3% deficit or Ireland who hopefully will have a 3% deficit but a population where a only a small amount of people are old (i think only 12% of Irish people are OAPs) and is better able to pay its debt off in the future.

srsly78

hfallada wrote: »

I think you need to take into account the structure of the country population. Is Germany who have a rapidly aging population going to be able to sustain a 3% deficit or Ireland who hopefully will have a 3% deficit but a population where a only a small amount of people are old (i think only 12% of Irish people are OAPs) and is better able to pay its debt off in the future.

And yet Germany can borrow money a lot more cheaply than we can - this tells you that the market disagrees with your hypothesis.

KyussBishop

SupaNova2 wrote: »

He points out that Bernholz doesn't talk about a collapse in industry as a factor(which I think he actually covers in parts of the book). A collapse in industry alone cannot cause continuous hyperinflation. His other main point is hey look at WWII. Drafting 2/3's of your adult population into the army, putting them on rations having them occupied all of their waking hours building weapons or gunning down the enemy leaves little room to bid up a cpi that won't show much with price controls. And the author's other points miss mostly due to a complete misunderstanding of Bernholz on loanable funds theory.

Also can you define what you consider scaremongering? Most would describe it as using fear to make your argument. Can you give an example of Bernholz trying to whip up fear? Also are you aware that he doesn't currently think there is much danger of hyperinflation in the US? To quote him:
“But does this mean that inflation may evolve into a hyperinflation in the United States? I believe not.”

Again, that's special pleading in the case of WWII; either the causation of high deficit-to-GDP=hyperinflation holds, or it doesn't, and if it doesn't then deficit-to-GDP arguments can't be used to imply hyperinflation in other cases; not without a much more detailed line of argument explaining the mechanics that will lead to hyperinflation, explaining what is unique about the particular economy, that will lead it to hyperinflation.

I'd call something scaremongering, where a catastrophic outcome like hyperinflation is implied with very poor evidence; that is pretty much exclusively used to try and scare people away from a particular course of action (including as setting up reason to engage in condescension as dissuasion, when someone doesn't shy away from the topic), like maintaining large deficits or utilizing money creation for public use.

SupaNova2 wrote: »

His thesis or his book isn't merely large deficit -> hyperinflation, feedback loops, capital controls, the willingness of the government to pullback and more are covered.

Well remember, that we're discussing this because of your comment "From memory 10% deficits for just a couple of years in a row can push one into hyperinflation territory.", so this contradicts that and shows it is not nearly as simple as defict-to-GDP.

SupaNova2 wrote: »

What happened your theory of debt free money? Hard to have a discussion with you if you keep switching things up. And in either case you should know by now, I'm sure MMT stresses it enough, that new money is created by CB's to fill the gap when debt issued cannot be covered by sales to existing currency holders.

It's not a theory, debt-free money has been issued before (greenbacks for one); in any case, discussion in this thread hasn't revolved around money creation, but around defict spending (through debt), and in particular, the idea of deficit-to-GDP ratio's leading to hyperinflation.

With debt-based money, money is issued to provide loans, and pretty much only that; it depends on perpetual economic growth (more loans) to keep going, because the accumulation of interest payments immediately causes total debt to exceed total money supply (causing economic cycles).

We are jumping between deficit spending with debt, and public money creation a bit, but mostly it is about the deficit-to-GDP argument.

SupaNova2 wrote: »

Bernholz and I agree, and also add that demand for money/currency is affected by its store of value function, no-one wants to hold a currency that rapidly depreciates.

Depreciation depends also upon economic activity, and also upon the trade balance of the country; if you have increased economic activity soaking up the money, or increased exports increasing external demand for money (if increased economic activity hasn't already soaked up the surplus), this doesn't need to be a significant concern.

SupaNova2

KyussBishop wrote: »

AWell remember, that we're discussing this because of your comment "From memory 10% deficits for just a couple of years in a row can push one into hyperinflation territory.", so this contradicts that and shows it is not nearly as simple as defict-to-GDP.

I didn't say it as simple deficit to gdp, hence the use of the word "can" rather than will. I thought it was obvious all deficits are not equal.